The euro: a currency in search of a deeper
market, enhanced economic reform and a stronger voice on the world stage

Some euro area Member States are adjusting too slowly to economic
shocks, which creates the risk that the gap between fast and slow growth
countries could become entrenched over time unless the pace of structural reform
is stepped up. This is one of the conclusions of the first Annual Statement on
the Euro Area. Another is that despite the powerful “one market, one
money” argument of the 1980s the European Union’s single market is
still largely unfinished business. Tackling these weaknesses will allow euro
area members to realise the full benefits of the single market and raise their
growth potential and job creation. Finally, although it accounts for a fifth of
world trade and 25% of world reserves, the euro area lacks a coherent voice on
the world stage. Projecting itself more strongly would allow the euro area to
show economic leadership and to promote stability in the world economy and
financial markets.

“Seven years after its creation, the euro has brought huge benefits,
the most significant, perhaps, being the induced resilience to external shocks
– from soaring and now persistently high oil prices to the emergence of
competition from China. But the euro alone cannot solve Europe’s economic
problems: it needs the support of structural reform, the completion of the
single market – especially in the services sector – and a stronger
voice on the world stage”, said Economic and Monetary Affairs
Commissioner Joaquín Almunia.

The Commission today adopted a first Annual Statement on the Euro Area which
calls on Member States to step up efforts to increase the growth potential and
deliver more jobs to bring the number of unemployed down more rapidly.

The challenges for the euro area members, which have a particular
responsibility towards the 310 million people who share the euro, are to speed
up the pace of economic reform, promote prudent macroeconomic policies, complete
the single market and show leadership on the world stage.

Economic reforms

At 2.1% this year, growth is expected to be slightly above potential in the
euro area and create over a million new jobs. The three million already created
in the last four years have brought the unemployment rate down to 7.9% in May,
the lowest level in nearly five years, but not enough for the 12 million who
remain jobless in the euro area.

Although structural reform benefits all EU countries, euro-area members have
an added incentive to step up the pace of reform because in a monetary union,
well-functioning product, labour and capital markets would ease economic
adjustment and could raise potential growth from 2% to 3%.

The action that needs to be taken across the EU is identified in the
Integrated Guidelines for Growth and Jobs for 2005-2008 and in the National
Reform Programmes. Key priorities remain increasing the pace of R&D,
promoting competition in services and network industries and making labour
markets more adaptable.

These priorities are particularly acute for euro area members. If they are
not realised, the differences in growth and inflation may become more entrenched
within the euro area, require even more significant adjustment efforts to
recover lost competitiveness and act as a brake on the economic growth of the
whole area.

Promoting prudent macroeconomic policies by consolidating public finances now
that the euro area is experiencing the most robust recovery since 1999 is
equally crucial. Steps could be taken to increase the effectiveness of economic
policy coordination in this field, for example by submitting Stability and
Convergence Programmes before the summer i.e. when the national budgets are
typically still in formation stage.

One money, one market...

In the 1980s, Member States decided that the single market in the making
required a single currency. The euro was created, but in many aspects lacks the
support that would arise from a complete and well-functioning single market.

The importance of promoting greater integration in the services sector cannot
be overstated given that it accounts for around 70% of total jobs and value
added in the euro area and holds the key to lower prices and productivity
increases for the economy at large.

Financial market integration, in particular, would contribute to a better
functioning of the euro area and would increase the level of the euro
area’s GDP by between 0.5 and 1.1% over
time.[1]

...one voice ?

Projecting a strong voice on the world economic stage would also clearly help
the euro area better represent its own interests and address the challenges
faced by the global economy.

Today, the euro area represents about one sixth of world GDP and one fifth of
world trade. The euro accounts not only for a substantial and increasing part in
the denomination of the international debt market (31.5 % versus 44 % for the US
dollar by mid-2005), but also for a large part of international bank liabilities
and foreign exchange transactions.

And yet the euro area's external representation in international financial
institutions and fora lacks coherence – in spite of the agreement at
the European Council in Vienna in December 1998 to address this issue. This
shortcoming makes it difficult for the euro area to promote the shared interests
of its members and show leadership on global economic issues, including,
crucially, how to avoid a disorderly unwinding of global imbalances. The
Annual Statement on the Euro Area in the form of a Communication and a detailed
Report is available on:http://ec.europa.eu/economy_finance/publications/european_economy/2006/eespecialreport0306_en.htm